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Incorporation and IRS Regulations - FGS Wiki

Incorporation and IRS Regulations


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[[Category:Strategies for Treasurers]]
  
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'''NOTE: Inasmuch as federal and state tax laws change from time to time, you are urged to refer to the IRS website at [http://www.irs.gov] and to your respective state's governmental website for current details. Your organization may also want to consult with a tax attorney.'''
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 +
== INTRODUCTION ==
 +
 +
Most people who become leaders in a
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genealogical society do so because they
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believe in the goals and programs of the
 +
organization and are willing to volunteer time
 +
and talent. Usually, their talents do not
 +
include knowledge about the Internal Revenue
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Service requirements for managing a nonprofit
 +
organization. However, learning even a few
 +
basic regulations will help both the volunteer
 +
and the organization avoid potential problems.
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Decision-makers within an organization
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should first weigh the advantages and
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disadvantages of a nonprofit corporation.
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 +
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== INCORPORATION ==
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Corporation: An association of individuals
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incorporated under the authority of state law.
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Nonprofit Tax–Exempt Corporation: A
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corporation organized for nonprofit activity,
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with purposes that qualify it for exemption
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from paying federal corporate income taxes.
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== ADVANTAGES OF A NONPROFIT CORPORATION ==
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<ul>
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<li>Lawsuits can be filed only against the
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assets of the organizations, not against the
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property of those who manage or belong to
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the organization.
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<li>Incorporation protects the individual
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members from liability for acts performed
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in behalf of the corporation. If an accident
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occurs at a meeting or workshop, the
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individual members of the incorporated
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society will be exempt from litigations.
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This protection of the individual members
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is in itself worth the effort required to
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incorporate.
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<li>An application can be filed with the
 +
Internal Revenue Service for tax–exempt
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status. Contributors to a nonprofit
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corporation with tax–exempt status may be
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able to deduct donations on their income
 +
tax returns (but this is true only if they
 +
itemize). This can be an important aspect to
 +
fund-raising.
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<li>Most foundations and government agencies
 +
require that a society applying for funding
 +
or grants for establishment of a library or
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museum be a nonprofit tax–exempt
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corporation. The organization should be
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incorporated if it owns a building to house
 +
a library, society office, or museum.
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<li>People will more likely join a society that is
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a nonprofit, tax–exempt corporation
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because of the limited legal liability. They
 +
know that the society's Articles of
 +
Incorporation and bylaws conform to state
 +
requirements and that the society must
 +
maintain proper records, keep its minutes
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up–to–date, and abide by its bylaws.
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<li>A society’s status is increased in the
 +
community since other businesses and local
 +
government know they are dealing with an
 +
organization set up under law.
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<li>A nonprofit society can apply for bulk–rate
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mailing privileges, allowing it to mail a
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minimum of 200 pieces of mail at a low
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rate. Mailing newsletters and quarterlies at
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bulk–rate will result in a savings over first–
 +
class mail rate.
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</ul>
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 +
== DISADVANTAGES OF A NONPROFIT CORPORATION ==
 +
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<li>A tax–exempt society may not work for or
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against a candidate seeking political office.
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<li>A tax–exempt society is limited by federal
 +
regulations as to the amount which it can
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spend on lobbying to influence legislation
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or public opinion.
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<li>According to law, standards for
 +
membership may not discriminate by race
 +
or sex. The society does have a right to
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require certain qualifications for
 +
membership, which may include
 +
geographical area.
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<li>A society may be taxed on unrelated
 +
business income that exceeds $1000 and is
 +
not consistent with the stated tax–exempt
 +
purposes of the organization.
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<li>No part of a nonprofit society's earnings
 +
can be distributed to its members. Proper
 +
expenses of officers and members can be
 +
reimbursed providing their activities further
 +
the purposes of the society.
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<li>A society may be so small or its activities
 +
so limited that there is no need for formal
 +
incorporation.
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<li>Dissolution is provided for by the laws of
 +
the state in which incorporated. A society
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should be certain that it is going to be in
 +
existence for many years if it incorporates,
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because the law requires that in the event
 +
the society dissolves, its assets must be
 +
given to another nonprofit organization.
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 +
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== INCORPORATION CONSIDERATIONS ==
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 +
First, appoint a committee to investigate
 +
incorporation. They must consider such things
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as a proper name, the purposes, and necessary
 +
legal assistance. Incorporation is regulated by
 +
state law and differs in each. Write to the
 +
proper state authority, requesting all
 +
information, pamphlets, and sample Articles
 +
of Incorporation that are available.
 +
 +
Thoroughly investigate and acquire all
 +
necessary papers and information before
 +
consulting an attorney to draw up Articles of
 +
Incorporation under the “General Not for
 +
Profit Corporation Act.”
 +
 +
 +
== INCORPORATION PROCEDURES: ==
 +
<ol>
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<li>The name of the society must not be similar
 +
to another. Incorporation and IRS Regulations
 +
FGS Society Strategies, Set IV Number 3 Page 3
 +
<li>The purpose must be stated in the Articles
 +
of Incorporation. To apply for tax exemption
 +
later, the society must qualify as a tax–exempt
 +
organization.
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<li>Articles of Incorporation must be signed by
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the President or the Vice–President and the
 +
Secretary, one of whom is designated as the
 +
Registered Agent.
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<li>The Articles of Incorporation must be
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notarized.
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<li>The Articles of Incorporation are filed by
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mail or in person with the proper state office.
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</ol>
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== REQUIREMENTS ==
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<ol>
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<li>The organization must have a specific non–
 +
profit purpose as defined by Internal Revenue
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Service rules and fit into the categories it has
 +
established. A genealogical society will
 +
usually be classified as an educational
 +
organization under Section 501 (c) (3) of the
 +
IRS Code.
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<li>No one individual can benefit from the
 +
activities of the organization.
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<li>Lobbying cannot be a substantial part of the
 +
activities of the group.
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<li>The organization is not allowed to participate in political campaigns.
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</ol>
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== APPLICATION ==
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 +
A society that wants to apply for tax exempt
 +
status must use Form 1023 and pay a users
 +
fee. If the annual gross income of the
 +
organization is less than $10,000 over the last
 +
four years, the fee is $150. Otherwise, the fee
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is $500. IRS Publication 557, “Tax Exempt
 +
Status for Your Organization,” details the
 +
requirements.
 +
 +
Organizations with less than $5,000 of annual
 +
gross income are not required to file a Form
 +
1023. However, if the organization has not
 +
filed the Form 1023 and has received a
 +
determination letter from the Internal Revenue
 +
Service, donations to the organization will not
 +
be deductible for income tax purposes.
 +
 +
 +
== STATE REQUIREMENTS ==
 +
 +
Each state has its own requirements for
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nonprofit and tax exempt status. Many will
 +
accept recognition from the Internal Revenue
 +
Service for this status. The publication, How
 +
to Form a Nonprofit Corporation, provides a
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state-by-state outline of these requirements.
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 +
'''FORM 990'''
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Societies with average annual gross revenues
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over $25,000 are required to file an
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informational Form 990 with the Internal
 +
Revenue Service. This is due by the 15th day
 +
of the 5th month after the close of the
 +
accounting year. An extension can be
 +
requested.
 +
 +
The IRS defines gross revenues as all of the
 +
money received in a year. A society which
 +
holds a workshop or conference which
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produces $25,000 of revenues, even with
 +
expenses of an equal amount, will probably be
 +
required to file the Form 990 because the
 +
amount of expenses are not considered when
 +
calculating gross revenue.
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 +
'''UNRELATED INCOME'''
 +
Another type of income that can create
 +
potential problems is “unrelated income.” This
 +
could occur if your group undertakes a fund
 +
raising project that is completely unrelated to
 +
your stated purposes. Probably holding a genealogical conference,
 +
publishing and selling transcribed records, or
 +
designing and marketing forms would not
 +
cause a problem. If the fund-raising effort is
 +
done entirely by volunteers, again, it will
 +
probably not treated as “unrelated income.”
 +
However, if your fund raising activity—such
 +
as selling books which are not related to the
 +
purposes of your organization as are the
 +
genealogical ones—competes with for–profit
 +
business, this could create an “unrelated
 +
income” problem. The form 990–T would
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then be filed and income tax must be paid on
 +
the profits.
 +
 +
These basic principles of nonprofit and tax
 +
exempt status are management lessons all
 +
society leaders should know. Understanding
 +
and adhering to these regulations is your best
 +
insurance against potential problems with the
 +
Internal Revenue Service.

Revision as of 23:30, 13 August 2013

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